10/31/2005 @ 12:00AM

Talent Wars

Talent Wars

Flying on the Delta Shuttle with Bill Gates 12 years ago, I asked, “What Microsoft competitor worries you most?”

“Goldman Sachs.” I gave Gates a startled look. Was Microsoft about to try the investment banking business? “Software,” he said, “is an IQ business. Microsoft must win the IQ war, or we won’t have a future. I don’t worry about Lotus or IBM, because the smartest guys would rather come to work for Microsoft. Our competitors for IQ are investment banks such as Goldman Sachs and Morgan Stanley.”

I spent five days traveling the country with Gates, and he must have talked about IQ a hundred times. Getting the brightest bulbs to work at Microsoft has always been his obsession. It’s paid off. Microsoft does close to $40 billion in sales and has some 60,000 employees. That’s a whopping $650,000-plus of revenue per employee, topping IBM’s sales per employee twofold.

Along comes Google, with its revenue run rate of $6 billion and about 4,000 employees. Google’s sales per employee are $1.5 million, or 2.3 times that of Microsoft. This is like comparing Babe Ruth to Home Run Baker. Google now beats Microsoft in the IQ war.

One must state the obvious here–that IQ is a touchy subject. A 1971 Supreme Court ruling, Griggs v. Duke Power, discourages IQ tests in the workplace. Microsoft famously wiggled around Griggs by subjecting job applicants to verbal brain teasers. For example: If a spider fell to the bottom of a 50-foot well, and each day climbed up 3 feet and slipped back 2, how many days would it take the spider to get out of the well? (Hint: The answer’s not 50 days.) Google grabs its share of IQ by nabbing scientists and engineers from Stanford, MIT and Caltech.

Microsoft remains in the 99th percentile of high-IQ companies. I’d bet Microsoft has the highest-IQ-per-employee rate of any company with more than 50,000–or even 20,000–employees in the world. But Google now tops the software giant. Why? One reason is that Microsoft’s stock has been stuck in a trading range for five years. Gone are the days when you could join Microsoft, work 80 hours a week for five years and get rich with stock options. Google has become the place to get rich.

But that argument goes only so far. It can’t explain why Kai-Fu Lee, a Microsoft executive, joined Google this summer–after the IPO bonanza–to become head of its new R&D center in China. Microsoft quickly sued Google over Lee’s departure, claiming Lee had violated a noncompete agreement. (On Sept. 13 a U.S. court let Lee start his job at Google.) You can guess what Lee’s motivation to jump ship was. At Google one works to change the world; at Microsoft one works to protect the Windows and Office profit margins. Which mission do you think high-IQ people prefer?

Microsoft is caught in a classic dilemma. Nearly all of its $12 bil-lion in annual profits come from two products–Windows and Office. These must be defended at all costs. One of those costs is backward compatibility. For example, Windows Vista must be able to run older versions of Office. That’s a laudable goal, but it carries a huge penalty. Microsoft needs a Russian army of 7,000 to 10,000 engineers to grind out the 50 million-plus lines of code that will constitute Windows Vista. The complexity of the Vista project has created its own management challenges. Last month Microsoft shook up its top ranks in an attempt to become faster and leaner.

That may or may not work. For Microsoft the longer-term challenge is the one that keeps Bill Gates up at night: the IQ war. The best and brightest are not satisfied to defend legacy. They want to change the world.

Strength in Pairs

What’s the best advice one could give a young entrepreneur? Find a partner with complementary skills. It’s no coincidence that so many of today’s thriving high-tech firms began as partnerships.

Bill Hewlett and David Packard teamed up in the 1930s. Bob Noyce and Gordon Moore founded Intel in 1968. During the 1970s Bill Gates and Paul Allen started Microsoft; Steve Jobs and Steve Wozniak, Apple Computer; Larry Ellison and Bob Miner, Oracle; Roger Marino and Dick Egan, EMC; and Jim Goodnight and John Sall, SAS Institute.

During the 1980s John Warnock and Charles Geschke left the Xerox Palo Alto Research Center to found Adobe Systems. Len Bosack and Sandy Lerner, a husband-and-wife team working at Stanford University, hatched Cisco. And Scott Cook and Tom Proulx founded Intuit. The 1990s gave us Yahoo founders David Filo and Jerry Yang and Google founders Sergey Brin and Larry Page. This decade has seen Skype, founded by Niklas Zennström and Janus Friis.

Pairings work. The companies cited above have a value approaching a trillion dollars.